Everybody hated probabilities in high school. The exercises like a bag with 20 red balls and 30 black balls, draw 2, what is the probability of having 2 black balls?
Trading is managing your luck at playing with a system that is random, and any forecast you make has non-zero chance to be wrong! In other words, you are not trading the market, you are trading a belief that the market will go (or continue to go) in one direction for some time to make profits. You must not leave that to anyone having no interest in probabilities.
Take the example of weather. You are not asking climatologist about the weather next week. Climatologists focus on long term climate change and whatever happens in the weeks or even months is insignificant; in other words it is noise! Meteorologists, on the opposite, are concerned by the short term, they have made a model in which they believe, after having tested many weather conditions and they bet on something likely to happen, e.g. sunny weather, and sell this information to their customers. You know weather forecasts are never perfect but they are improving as more and more data and computing power is made available to them!
Same goes with trading. Economists are interested in long term economic cycles (Kondratieff, …) and so their comments on many TV channels why S&P500 is up 0.5% because (un)employment shows an increase of 0.3%. Not only is 0.5% up or down on market index is noise, but there is surely no correlation at all, if you would look at data from the past.
Traders main interest should and must be how to have a system that can say with a level of certainty where the market is going in the short term. The model the trader is using should have a positive expectation, i.e. being profitable over long periods.
Yes, but sometime, the weather is sunny for very long time, and nothing happens? Correct! And for trader, it is the same. When market is too quiet or too much random (like it is now), trader must refrain from trading and risk blowing up his account
Trade safely, use stops, and don’t forget to wash your hands!
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What’s the answer to the two blackball probabilities?